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Super concessions for first home savers and downsizers

Does superannuation offer an avenue to help downsizers and first home savers? The Government seems to think so. Late last month the detail of the housing initiatives announced in the Federal Budget were released for consultation. We explore what’s on offer and the implications.

Super concessions for downsizers
If you are over 65, have held your home for 10 years or more and are looking to sell, from 1 July 2018 you might be able to contribute some of the proceeds of the sale of your home to superannuation

The benefit of this measure is that you can contribute a lump sum of up to $300,000 per person to superannuation without being restricted by the existing non-concessional contribution caps – $100,000 subject to your total superannuation balance – or age restrictions. It’s a way of building your superannuation quickly and taking advantage of superannuation’s concessional tax rates. The $1.6 million transfer balance cap will continue to apply so your pension interests cannot exceed this amount. And, the Age Pension means test will continue to apply. If you are considering using this initiative, it will be important to get advice to ensure that you are eligible to use this measure and the contribution does not adversely affect your overall financial position.

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The downsizer initiative applies to the sale of any dwelling in Australia – other than a caravan, houseboat or mobile home – that you or your spouse have held continuously for at least 10 years. Over those 10 years, the dwelling had to have been your main residence for at least part of the time. As long as you qualify for at least a partial main residence exemption (or you would qualify for the exemption if a capital gain arose) you may be able to access the downsizer concession. This means that you do not actually need to have lived in the property for the 10 year period being tested.

The rules also take into account changes of ownership between two spouses over the 10 year period prior to the sale. This could assist in situations where a spouse who owned the property has died and their interest is inherited by their surviving spouse. The surviving spouse can count the ownership period of their deceased spouse in determining whether the 10 year ownership period test is satisfied. This rule could also assist in situations where assets have been transferred as a result of marriage or de facto relationship breakdown.

In general, the maximum downsizer contribution is $300,000 per contributor (so, $600,000 for a couple) but must only come from the proceeds of the sale. The contribution/s need to be made within 90 days after your home changes ownership (generally, the date of settlement) but you can apply to the Tax Commissioner to extend this period. And, the initiative only applies once – you cannot use it again for future properties.

Using super to save for your first home
Saving for a first home is hard. From 1 July 2018, the first home savers scheme will enable first-home buyers to save for a deposit inside their superannuation account, attracting the tax incentives and some of the earnings benefits of superannuation.

Home savers can make voluntary concessional contributions (for example by salary sacrificing) or non-concessional contributions (voluntary after tax contributions) of $15,000 a year within existing caps, up to a total of $30,000.

When you are ready to buy a house, you can withdraw those contributions along with any deemed earnings in order to help fund a deposit on your first home. To extract the money from super, home savers apply to the Commissioner of Taxation for a first home super saver determination. The Commissioner then determines the maximum amount that can be released from the super fund. When the amount is released from super, it is taxed at your marginal tax rate less a 30% offset.

For example, if you earn $70,000 a year and make salary sacrifice contributions of $10,000 per year, after 3 years of saving, approximately $25,892 will be available for a deposit under the First Home Super Saver Scheme – $6,210 more than if the saving had occurred in a standard deposit account (you can estimate the impact of the scheme on you using the estimator).

If you don’t end up entering into a contract to purchase or construct a home within 12 months of withdrawing the deposit from superannuation, you can recontribute the amount to super, or pay an additional tax to unwind the concessional tax treatment that applied on the release of the money.

To access the scheme, home savers must be 18 years of age or older, and cannot ever have held taxable Australian real property (this includes residential, investment, and commercial property assets). Home savers also need to move into the property as soon as practicable and occupy it for at least 6 of the first 12 months that it is practicable to do so.

As with the concession for downsizers, the first home saver scheme can only be used once by you.

While the capacity to voluntarily contribute to the first home savers scheme started on 1 July 2017 (with withdrawals available form 1 July 2018), it’s best to wait until the legislation is confirmed by Parliament just in case anything changes.

Main residence exemption removed for non-residents
The Federal Budget announced that non-residents will no longer be able to access the main residence exemption for Capital Gains Tax (CGT) purposes from 9 May 2017 (Budget night). Now that the draft legislation has been released, more details are available about how this exclusion will work.

Under the new rules, the main residence exemption – the exemption that prevents your home being subject to CGT when you dispose of it – will not be available to non-residents. The draft legislation is very ‘black and white.’ If you are not an Australian resident for tax purposes at the time you dispose of the property, CGT will apply to any gain you made – this is in addition to the 12.5% withholding tax that applies to taxable Australian property with a value of $750,000 or more (from 1 July 2017).

Transitional rules apply for non-residents affected by the changes if they owned the property on or before 9 May 2017, and dispose of the property by 30 June 2019. This gives non-residents time to sell their main residence (or former main residence) and obtain tax relief under the main residence rules if they choose.

Interestingly, the draft rules apply even if you were a resident for part of the time you owned the property. The measure applies if you are a non-resident when you dispose of the property regardless of your previous residency status.

Special amendments are also being introduced to apply the new rules consistently to deceased estates and special disability trusts to ensure that property held by non-residents is excluded from the main residence exemption.

The rules have also been tightened for property held through companies or trusts to prevent complex structuring to get around the rules. The draft amends the application of CGT to non-residents when selling shares in a company or interests in a trust. The rules ensure that multiple layers of companies or trusts cannot be used to circumvent the 10% threshold that applies in order to determine whether membership interests in companies or trusts are classified as taxable Australian property.

The residency tests to determine who is a resident for tax purposes can be complex and are often subjective. Please contact us if you would like to better understand your position and the tax implications of your residency status. Simply living in Australia does not make you a resident for tax purposes, particularly if you continue to have interests overseas.

What everyone selling a property valued at $750k or more needs to know

Every vendor selling a property needs to prove that they are a resident of Australia for tax purposes unless they are happy for the purchaser to withhold a 12.5% withholding tax. From 1 July 2017, every individual selling a property with a sale value of $750,000 or more is affected.

To prove you are a resident, you can apply online to the Tax Commissioner for a clearance certificate, which will remain valid for 12 months.

While these rules have been in place since 1 July 2016, on 1 July 2017 the threshold for properties reduced from $2 million to $750,000 and the withholding tax level increased from 10% to 12.5%.

The intent of the foreign resident CGT withholding rules is to ensure that tax is collected on the sale of taxable Australian property by foreign residents. But, the mechanism for collecting the tax affects everyone regardless of their residency status.

Properties under $750,000 are excluded from the rules. This exclusion can apply to residential dwellings, commercial premises, vacant land, strata title units, easements and leasehold interests as long as they have a market value of less than $750,000. If the parties are dealing at arm’s length, the actual purchase price is assumed to be the market value unless the purchase price is artificially contrived.

If required, the Tax Commissioner has the power to vary the amount that is payable under these rules, including varying the amounts to nil. Either a vendor or purchaser may apply to the Commissioner to vary the amount to be paid to the ATO. This might be appropriate in cases where: 

• The foreign resident will not make a capital gain as a result of the transaction (e.g., they will make a capital loss on the sale of the asset);
• The foreign resident will not have a tax liability for that income year (e.g., where they have carried forward capital losses or tax losses etc.,); or
• Where they are multiple vendors, but they are not all foreign residents.
 
If the Commissioner agrees to vary the amount, it is only effective if it is provided to the purchaser.

The withholding rules are only intended to apply when one or more of the vendors is a non-resident. However, the rules are more complicated than this and the way they apply depends on whether the asset being purchased is taxable Australian real property or a company title interest relating to real property in Australia.

Please contact us if you need assistance navigating the foreign resident CGT withholding rules or are uncertain about how the rules are likely to apply to a transaction.

The Tax Commissioner’s hit list

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Every so often the Australian Taxation Office (ATO) sends a ‘shot across the bow’ warning taxpayers where their gaze is focussed. Last month in a speech to the National Press Club, Tax Commissioner Chris Jordan did exactly that. Part of the reason for this public outing is the gap between the amount of tax the ATO collects and the amount they think should be collected – a gap of well over 6% according to the Commissioner.

“The risks of non-compliance highlighted by our gap research so far in this market are mainly around deductions, particularly work related expenses. The results of our random audits and risk-based audits are showing many errors and over-claiming for work related expenses – from legitimate mistakes and carelessness through to recklessness and fraud. In 2014-15, more than $22 billion was claimed for work-related expenses. While each of the individual amounts over-claimed is relatively small, the sum and overall revenue impact for the population involved could be significant,” the Commissioner stated.

Individuals – the hit list
• Claims for work-related expenses that are unusually high relative to others across comparable industries and occupations;
• Excessive rental property expenses;
• Non-commercial rental income received for holiday homes;
• Interest deductions claimed for the private proportion of loans; and
• People who have registered for GST but are not actively carrying on a business.
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While small in value, the ATO are also concerned about the amount of people who appear to be claiming deductions by default for items such as clothing expenses. In 2014–15, around 6.3 million people made a claim for $150 for work related clothing – the level you can claim without having to fully substantiate your expenses. Those 6.3 million claims amounted to $1.8 billion in deductions.

Small business – the hit list
• Those deliberately hiding income or avoiding their obligations by failing to register, keep records and/or lodge accurately;
• Businesses that report outside of the small business benchmarks for their industry;
• Employers not deducting and/or not sending PAYG withholding amounts from employee wages;
• Employers not meeting their superannuation guarantee obligations;
• Businesses registered for GST but not actively carrying on a business;
• Failure to lodge activity statements; and
• Incorrect and under reporting of sales.

If your business is outside of the ATO’s benchmarks, it’s important to be prepared to defend why this is the case. This does not mean that your business is doing anything wrong, but it increases the possibility that the ATO will look more closely at your business and seek an explanation.

Private groups – the hit list
• Tax or economic performance not comparable to similar businesses;
• A lack of transparency in tax affairs;
• Large, one-off or unusual transactions, including transfer or shifting of wealth;
• A history of aggressive tax planning;
• Choosing not to comply or regularly taking controversial interpretations of the law;
• Lifestyle not supported by after-tax income;
• Treating private assets as business assets; and
• Poor governance and risk-management systems.

Property developers – the hit list
• Developers using their SMSF to undertake or fund the development and subdivision of properties leading to sale;
• Where there has been sale or disposal of property shortly after the completion of a subdivision and the amount is returned as a capital gain;
• Where there is a history in the wider economic group of property development or renovation sales, yet a current sale is returned as a capital gain;
• How profit is recognised where related entities undertake a development (i.e., on the development fees as well as sales of the completed development);
• Whether inflated deductions are being claimed for property developments;
• Multi-purpose developments – where units are retained for rent in a multi-unit apartment, to ensure that the costs are appropriately applied to the properties produced.

These are just a small sample of the ATO’s area of focus. Other areas include tax and travel related expenses and self-education expenses. We’ll guide you through the risk areas pertinent to your individual situation but if you are concerned about any of the ‘hit list’ areas mentioned, please contact us.

Quote of the month
“The Entrepreneur always searches for change, responds to it, and exploits it as an opportunity.”
Peter Drucker

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained

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Seven Mistakes Not to Make When Claiming Tax Deductions

Seven Mistakes Not to Make When Claiming Tax Deductions

Each year, the technological resources available to assist the Australian Tax Office in identifying and investigating discrepancies in financial and income reporting become more comprehensive and far-reaching. This enables the ATO to better meet their mandate of ensuring taxpayer compliance with their lawful obligations by being able to more accurately detect false deductions and other tax avoidance methods.

It is not unusual for the ATO to issue warnings around tax time about their growing capacity to detect false expense claims or income reporting, and with an ever increasing amount of data at their disposal, their capacity to do so is set to increase even further.

This is not a warning to high-flying executives or companies seeking to make use of tax loopholes or other avoidance methods, these warnings are issued to all taxpayers and workers. The ATO has the capacity to cross-check a worker or employee’s reported employment expenses with the employer, and they will do so if your claimed expenses exceed the benchmark for your industry or sector. You can check these income and occupation benchmarks online using the ATOs website, or speak to your accountant or registered tax agent.

Work-Related Expenses
Claims for tax deductions on work-related expenses are particularly suspect, with the ATO continually advising that it wishes for taxpayers to claim deductions on all the expenses they are entitled to deduct, no more and no less. Guides are issued for specific industries and occupations which list the expected deductions relevant to that kind of income, and the ATO publishes resources on their website to assist taxpayers in identifying the expenses they may be entitled to claim for their specific occupation.

There are three important things to consider when claiming work-related expenses, and if these are not satisfied, you likely are not eligible for the deduction:
• Is the expense directly related to the earning of your taxable income?
• Did you spend the money yourself and not receive a reimbursement? If the expense was already reimbursed by your employer or another stakeholder, they are entitled to claim the deduction and not you.
• Do you have a record to prove that you met the expense for which you are claiming a deduction? Receipts are the gold-standard, but bank statements or other financial records may be used to identify the expense, when it was paid, and who it was paid to.

Rule Number 1: Ensure that your claims are justifiable
If your expense claims appear to be unusually high, it is likely that the ATO will contact your employer and request information about the duties you are required to perform as part of your employment. This means that if you are claiming travel expenses, but it turns out that you live a five minute walk from your place of employment, or if you claim for safety gear despite all the required equipment being provided by your employer, you are likely to have your deductions disallowed.

So not only does the total amount for which you are claiming expense-related deductions need to be within the reasonable limit for your taxpayers with similar circumstances, they also need to be reasonable in relation to your individual circumstances. The ATO has the capacity to obtain more detailed information about your employment and personal circumstances, and will do so if they believe your deductions do not accurately reflect the expenses you are likely to have incurred.

Rule Number 2: Ensure that you haven’t been reimbursed already
While there are certainly cases of fraudulent deduction claims on expenses which were reimbursed prior to tax time by the employer or another stakeholder, this rule is more complicated than the first.
Say for example that you are required to travel interstate to conduct business on behalf of your employer, or to carry out your expected duties. It is likely that the employer will explicitly reimburse you for this expense, as they may be able to claim a deduction on it themselves. If you were to claim such an expense despite already being reimbursed, this is obviously an act of non-compliance with your tax obligations.

In some cases, the line can be less clear. For example, it may state in your employment contract that reasonable travel costs or other expenses are included as part of your salary package. You may have forgotten this, and claimed deductions on expenses that were stated as being part of your salary. If the ATO were to examine your claims and contact your employer, they may disallow your deductions in full when they find out that the expenses were already met.

For this reason, it is very important that you check with your employer about the expenses you incur during the course of your occupation. They may inform you that the expense is already covered by payments made to you, and in this case you would be unable to claim related tax deductions.

In the case of travel, you may take public transport to work every day. If you keep a record of your public transport expenses, and your employment contract makes no mention of reimbursement for transport expenses, then this may be a deduction that you are entitled to claim at tax time.

Rule Number 3: Get Good Tax Advice
As an accounting firm, we understand the important of professional assistance in lodging your tax return and other tax matters. However, it seems to be all too common for new or inexperienced tax agents to make unrealistic promises to some clients about the deductions that they may be entitled to. If you are using a tax agent to lodge your tax return, ensure that they are experienced enough to understand what is likely to be considered an eligible deduction and what is not. There are many cases where tax agents have submitted returns claiming unusually high deductions, which then draws the ATO’s attention to that agent and their clients. If you are unfortunate enough to have engaged an agent who is conducting business of such low standards, you may find that your deductions will be disallowed in full, yet you have still had to pay the tax agent.

By being aware of the other rules on this list, you are better able to identify instances where a tax agent may be trying to see how many deductions they can get away with, not necessarily to your benefit. The task of a registered tax agent is to ensure that you receive all the deductions you are entitled to, no less, but certainly no more. To see tax agents and accounting professionals as money magicians at tax time is to severely understate the importance and complexity of the duties they are required to perform.

Rule Number 4: Keep records to substantiate your claims
It is vital that you keep records of all your expenses and transactions related to claims, or potential claims, which you may lodge at tax time. Keeping these records will enable you to swiftly produce verification in the event of a follow up by the ATO, and even if you are found to be ineligible for the deduction, by keeping adequate records relating to your claims you are demonstrating due diligence and making the ATO’s job easier, potentially reducing your liability. If you are unsure whether or not you are eligible to claim an expense, you can show the records you kept to your tax agent or accountant and they can assist you in claiming the appropriate deductions.

Rule Number 5: Never make claims for private, or mostly private, expenses
If you are unable to demonstrate through the provision of written evidence that your claims relate directly to your earning of income, then they are not eligible claims. For example, if you claim travel expenses after deciding to travel first-class on an interstate rail service, your decision to travel first-class is a private one and is not determined by your employment obligations.

Likewise, if your employer does not provide you with a uniform, but instructs employees to wear neat business-appropriate attire, you may not claim related clothing expenses as these clothes may also be used for private purposes.

Rule Number 6: Understand the basics of what is and is not eligible for deduction
If you understand the fundamentals of tax deductions for income-related expenses as they apply here in Australia, then you are better able to judge what you are and are not eligible to claim. Do your homework before tax time, and speak with your accountant or tax agent about the typical expenses profile for someone with your income and occupation. Check online for resources, such as the ATO guides outlining common deductions by occupation, which you can use to see what you are expected to claim for. You may notice things that you weren’t even aware you could claim deductions on, and therefore find yourself with a more balanced tax return.

If you do not attempt to gain even a basic understanding of these rules, and leave the task of claiming deductions up to the cheapest and most convenient tax agent you can find, you may be in for much more hassle than its worth.

Rule Number 7: Create digital records, and back them up
When tax time approaches, it is a very good idea to create a file on your computer that contains the relevant documentation or records that you will use to verify your deductions claims. These could include electronic copies of your bank or credit card statements, as well as digital invoices and receipts. You can also add notes with the finer details that you may need to provide in the case of a follow up.

Back up your data by uploading it to a cloud-based service, this way you can access it from any device and there is minimal risk of losing it. Being able to provide written records promptly if requested to do so is an important part of meeting your tax obligations, and will assist you in obtaining the deductions you are entitled to receive.

Lodging Your Tax Return

When you lodge your tax return using an automated service such as the ATO’s MyTax system, any claims you make for expense deductions are compared against the claims of other taxpayers in your industry or occupation, as well as those who have a similar income. This comparison is performed automatically, and is shown to you during the MyTax reporting process so that you will receive a warning in real-time if you are claiming an unusually high amount in comparison to those in similar circumstances. Tools such as this are part of the standardization of the entire tax-return system here in Australia, meaning taxpayers are automatically assessed against the information reported by other taxpayers with similar circumstances.

There are also free online tools available to assist taxpayers in calculating the deductions they may be entitled to, such as the MyDeductions element of the official ATO app. You can use this tool to record your expenses as they happen, ensuring that you have a valid record of expenses which you intend to claim deductions for. This alleviates some of your burden at tax time by ensuring that you don’t have to sift through receipts or financial records to find evidence of your expenses.

Your registered accountant or tax agent is here to help. Kingston Knight has extensive experience in tax compliance and tax structuring, ensuring that you receive the deductions you are entitled to and that your tax return is processed as quickly as possible. We can also assist you in collecting and storing the required records, and will advise you if there is any cause for concern in the material you have provided to us. Ensuring your compliance with regulation is one of the greatest ways we can help you as registered tax agents, freeing you from unneeded disputes or follow-up action and allowing you to get on with business while receiving the deductions and discounts that are yours by right.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne tax and accounting services, or email us at admin@kingstonknight.com.au.

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ATO Audits – What You Need to Know

ATO Audits – What You Need to Know

Australia’s taxation and regulatory framework requires businesses, organisations, and individual taxpayers to comply with various laws and regulatory requirements. Broadly, these requirements relate to the reporting of correct financial information to the Australian Taxation Office in a timely manner, and compliance with requests from the ATO or other regulators for specific information or evidence to substantiate your reporting.

In proceeding with this article, we disclaim our writings and published content as making any legal claims with regard to the views, opinions, and information contained therein. This information is of a general nature, and the topics discussed are subject to variation in given circumstances or situations. Due care has been taken to only include information which is informative and that may serve to assist taxpayers in gaining awareness of their obligations and the regulatory requirements that may affect them.

The ATO may conduct an audit with relation to a number of tax issues, such as income tax, employment tax and employee obligations, Goods and Services Tax (GST), tax deductions, discounts, and concessions, and the production of statements and statutory documents just to name a few. Issues which may trigger an ATO audit or review could include the overstatement of deductions or the under-reporting of income, which both indicate a failure to comply with tax obligations.

For businesses and other organizations in particular, it is important to ensure compliance and minimize the risk of being audited, as facing an audit is seen as often seen as a sign of misconduct or negligence which has implications for the organization’s reputation. For any taxpayer, failing to comply may result in an enormous and unexpected tax bill which can have dire financial consequences, let alone the impact on professional status and credit viability.

As a business owner or the manager of an organization, or even as an individual taxpayer, maintaining an awareness of the record keeping and reporting requirements set out by the ATO and other regulators can ensure your compliance and reduce the risk of dispute or other action.

What Is an ATO Audit?
An audit is a detailed and comprehensive verification process, designed to assure the tax office that the audited party has complied with their tax obligations. The ATO has a number of methods which is may use to determine when an audit is to be performed on a party’s financial records. Detection systems, including data matching systems and systems that compare data from different public sources, such as government departments, with information obtained through the party’s tax returns or Business Activity Statements (BAS).

These methods may be used to conduct what is known as a risk review, which is basically a comparison of a given party’s financial reports and the standard industry figures or benchmarks. Such risk review processes may identify a discrepancy between the information reported by the party of interest and the data which represents the industry or sector benchmarks. If such discrepancies are identified, the ATO may conduct a review of the party’s financial statements or an audit, which is a more detailed investigation of the party’s financial position.

An ATO review may be the first step in this verification process, and involves an ATO-appointed reviewer checking relevant reports for misstatements or mistakes which may account for the discrepancy. This is why it is vital that all taxpayers keep records relevant to their tax liability, and that these records can be produced for the ATO in the event that a review is ordered.

If the ATO has grounds to believe that a standard review or follow-up would be unable to explain the discrepancies they have identified, or that the relevant party has not acted in compliance with their taxation obligations, they may then trigger an audit in to the party’s financial position.

How are ATO Audits Performed?

The tax office employs officers who specialize in the audit and review of financial information, known as ATO Audit Officers. If you are subject to a review or audit, an ATO Audit Officer may be assigned to examine your financial records and match this against the information that you have reported to the ATO. During this process, the auditor or reviewer may request information such as transaction lists, bank statements, receipts, or other proof of payments. The details may vary depending on the nature of the circumstances and the entity being reviewed or audited, as well as the nature of the discrepancy being investigated.

Following the initial review of this financial information, the appointed reviewer may be satisfied that the discrepancy can be explained by a mistake, or that the discrepancy does not reflect an attempt to avoid tax obligations. In this case, the review may be concluded and the reviewed entity or individual may receive important feedback on how they can minimize the risk of such action occurring again.

Should the reviewer conclude that the discrepancy cannot be explained through a review of financial information, or that the discrepancy indicates a deliberate attempt to avoid tax obligations, the matter may be referred to a department which initiates audits. If this happens, then the review will change into an audit, which is a much more thorough investigation.

What Is Targeted During an ATO Audit?
If the ATO decides that an audit is required to explain discrepancies in the information available to them, they may begin the audit process. This process involves the comprehensive analysis and verification of the audited party’s financial statements and other information. Generally, the focus of the audit will be on the source of the discrepancy which triggered the audit, but an audit should be considered as a thorough and complete examination of your financial position.

The Timeline of an ATO Audit
1. Once an audit has been decided upon as the appropriate method to determine the cause and nature of a discrepancy in financial reporting, you will receive written notification that an audit is underway. This notification may identify an Audit Officer who will conduct an interview with you face to face. You will be advised as to what to expect during this interview, and what information or documentation you may need to give to the interviewer.
2. At the interview, the Audit Officer may identify themselves and state their right to conduct the appropriate investigation, and may inform you about the reason for their investigation. The Audit Officer may provide you with their contact information, and ask that you forward them any questions or queries you have in relation to the audit. The Audit Officer may then spend time forming an understanding of the business, organization, or individual in question, and how it operates with regard to tax compliance and record keeping. This information may provide a blueprint from which the rest of the audit procedure may be derived.
3. Once the audit is underway, the ATO will make requests for any information or assistance they require from you to carry out their investigation. This will continue until they have obtained an appropriate amount of evidence to come to a conclusion on the matter and make a decision. Once the decision has been made, you will be informed of your rights, such as the right to bring a legal representative to the concluding interviews.
4. The final stage involves detailed questions and the answering of these questions, and will allow you to put your own questions to the auditors. Audit Officers may also make visits to business premises, these visits may or may not be announced. When the decision is formalized and the audit concluded, you will receive a written notice informing you of any adjustments made or penalties imposed, as well as the means by which you may object to or challenge the outcome of the audit.

The Importance of Tax Compliance
For businesses, individuals, and organisations alike, the task of tax compliance need not be a difficult one. Depending on the nature of your circumstances, you may need the assistance of a financial advisor or accountant to ensure that you are compliant with your tax obligations. Your accountant can advise you of these requirements and assist you in making the required reports and lodging documents with the ATO.
The best way to ensure compliance is to keep detailed records of your transactions and expenses, particularly if you wish to claim deductions on them. Record keeping can ensure that the required information is on hand should the ATO conduct a follow-up with you.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about auditing and accounting in Melbourne, or email us at admin@kingstonknight.com.au.

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GST Services

GST Services

The Goods and Services Tax is a tax of 10% that applies to most of the goods and services sold to Australian’s consumers. Businesses and organisations with a certain structure and turnover are required to register for the GST, which they then include in the price they charge to consumers for goods or services. If you are required to include GST in your prices, you are eligible to claim GST credits to offset the GST included in goods and services you purchase for your business.

The GST system contains some complex and time consuming registration, reporting, and credit-claiming procedures. Allow us, your accounting advisors and tax professionals, to take the hard work out of GST so you can focus on running your business.

Do I Need to Register for GST?
If you run an enterprise that generates a GST assessable turnover of $75,000 above, then you will need to register for the GST. For not-for-profit organisations, the turnover threshold is $150,000. You need an Australian Business Number (ABN) to register for the GST and claim any credits you are entitled to.

As registered tax agents, we can assist you in registering for the GST, as well as reporting your GST income and claiming GST credits.

Once you have registered for the GST, you will be required to report GST income and include relevant information in your Business Activity Statement, which will be due at certain intervals depending on the size and nature of your enterprise. BAS and other reporting requirements are among the most time consuming and difficult elements of the GST system, but these are easily managed with the appropriate tools, knowledge, and experience.

GST Credits
Once you have registered for the GST, you may be able to claim credits on the GST that you pay to other businesses, such as suppliers or service providers. These credits may allow you to claim the value of the GST your business pays as a refund from the ATO.

Our GST Services
As experienced accountants and registered tax agents, Kingston Knight works with small businesses, individuals, partnerships, companies, trusts, and superannuation funds to ensure that they meet the strict reporting and compliance requirements that apply under the GST system.

One of the most time and labor intensive components for those required to comply with the GST system is the Business Activity Statement (BAS) reporting requirement. Our cloud-based accounting software enables us to take the hard work out of BAS preparation and submission, whilst ensuring that the relevant data are compiled in perfect accordance with the prescribed requirements.

By ensuring that your reporting requirements are met with an efficient and personalized accounting service, you can get on with running your enterprise and doing what you do best.

Our GST Services Include:
• Assisting you in determining your GST obligations, and any adjustments to your business structure or procedures that may assist you in obtaining an optimal tax structure
• Assisting you with GST registration and reporting, including through the compilation and submission of your Business Activity Statement as required
• Assist you in identifying your GST expenditure and claiming any GST credits which you are eligible for.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting services, or email us at admin@kingstonknight.com.au.

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Fringe Benefits Tax – FBT Advice and Assistance

Fringe Benefits Tax – FBT Advice and Assistance

Also referred to as FBT for short, fringe benefits tax is paid by employers in relation to benefits or other non-income payments or concessions made to employees, as well as the families of employees or associates of the enterprise. Fringe benefits may be incorporated into the wages or salary paid to employees, or they may be offered as extra incentives or bonuses. Another example of circumstances in which an FBT liability exists is when the director of a trust or company receives benefits, bonuses, etc.

Fringe benefits tax is not the same as or included in income tax, they are separate taxes. FBT is only calculated in accordance with the monetary value of whatever fringe benefits are provided, without relation to other income.

Do I Need to Pay Fringe Benefits Tax?
If you provide your employees or their associates with fringe benefits, you might be required to register for and pay FBT. For FBT purposes, the employee in question may be past, current, or future in relation to their employment with you. They may also be the director of a trust or company.

FBT also applies to benefits that are not provided directly by you, but by a third party through an arrangement you have made.

The following are all examples of fringe benefits which may attract an FBT liability:
• Giving an employee or their associate a loan at a discounted rate
• Paying the cost of a gym membership for an employee or their associate
• Allowing employees to make private use of work cars
• Reimbursing an employee or their associate for an expense that does not relate to their employment with you, such as school or medical fees
• Giving an employee or their associate access to paid entertainment by giving them free tickets to events
• Making a salary sacrifice arrangement with an employee which includes benefits.

For FBT purposes, it is important to determine a worker’s employment status. Whether someone is employed as a volunteer, contractor, or employee is what determines their employment status in this context. Contractors and volunteers usually do not attract an FBT liability on benefits provided by their employer. Those engaged in ongoing, formal employment are likely to attract an FBT liability if they are provided with such benefits.

If you think you may need to pay fringe benefits tax, but are unsure, speak to your accountant or registered tax agent to seek clarification. The ATO requires employers to assess their own FBT liability for each year, with the FBT year running from the 1st of April to the 31st of March.

FBT Exemptions
As an employer, not all benefits you provide to employees will attract an FBT liability. If the benefit is directly related to the employee’s work or duties as part of their role, it may be assessed as a work-related item and therefore exempt from FBT. The following are examples of benefits that are likely to be assessed as work-related items:
• Tools of the trade
• Computer software or hardware
• Electronic devices including laptops, mobile phones, GPS systems, printers, tablets etc.
• Briefcases or other containers
• Protective clothing.

There are limits on work-related benefits that are exempt from FBT. If you provide a mobile phone, for example, you cannot provide the employee with another FBT exempt mobile phone until the next FBT year. If the original item is broken and a replacement is ordered, the replacement may be exempt from FBT. Exempt items must be things which will primarily be used for work, not private use.

Small businesses were recently granted an extension on the work-related item extension, allowing them to provide more than one work-related item of a particular function within a given FBT year. This means that the above requirements pertaining to the one-item-one-year exemption limit does not apply to small business employers.

Property Fringe Benefits
If you provide an employee or their associate with goods or property at a discount, or for free, this may constitute an assessable fringe benefit that attracts FBT. Examples of property fringe benefits might include:
• Real-estate/real property, such as buildings or land.
• Goods such as appliances, clothes, entertainment products etc.
• Other property, such as bonds or shares.

Residual Fringe Benefits
Residual fringe benefits are those which are the hardest to define, yet still satisfy the criteria required to attract an FBT liability. Remember that for tax purposes, benefits are defined as being any item, privilege, right, facility, service etc. that is not work-related.
Examples of benefits that might be assessed as residual fringe benefits include:
• Provision of services, such as a plumber offering their services free of charge to an employee
• Allowing an employee to make use of items or property owned by the employer, such as a camera or entertainment system
• Allowing an employee to make private use of a work vehicle which is not assessed as a car in relation to FBT, such as a motor scooter or utility.

If you are unsure whether or not you may be attracting an FBT liability through residual benefits, speak to your registered tax agent or accountant.

How Do I Reduce My FBT Liability?

If you believe that you may be providing benefits that attract an FBT liability, you may decide to replace these fringe benefits with other things that do not attract FBT liability. For example:
• By replacing or making-up for the lost fringe benefits with additional wage or salary payments
• Choosing only to provide your employees with benefits that do not attract an FBT liability, such as work-related items
• Replacing fringe benefits with other benefits that your employees would be eligible to claim as deductions on their income tax should they be required to meet the expense themselves
• By using employee contributions to offset the FBT liability. An example of this would be that you require an employee who is allowed to make use of their work car for private purposes to pay the operating costs of the vehicle. Be aware however that employee contributions may be subject to GST and may contribute to your assessable income.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne tax accounting services, or email us at admin@kingstonknight.com.au.

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Fringe Benefits Tax for Employers

Fringe Benefits Tax for Employers

Also referred to as FBT for short, fringe benefits tax is paid by employers in relation to benefits or other non-income payments or concessions made to employees, as well as the families of employees or associates of the enterprise. Fringe benefits may be incorporated into the wages or salary paid to employees, or they may be offered as extra incentives or bonuses. Another example of circumstances in which an FBT liability exists is when the director of a trust or company receives benefits, bonuses, etc.

Fringe benefits tax is not the same as or included in income tax, they are separate taxes. FBT is only calculated in accordance with the monetary value of whatever fringe benefits are provided, without relation to other income.
Do I Need to Pay Fringe Benefits Tax?

If you provide your employees or their associates with fringe benefits, you might be required to register for and pay FBT. For FBT purposes, the employee in question may be past, current, or future in relation to their employment with you. They may also be the director of a trust or company.

FBT also applies to benefits that are not provided directly by you, but by a third party through an arrangement you have made.

The following are all examples of fringe benefits which may attract an FBT liability:
• Giving an employee or their associate a loan at a discounted rate
• Paying the cost of a gym membership for an employee or their associate
• Allowing employees to make private use of work cars
• Reimbursing an employee or their associate for an expense that does not relate to their employment with you, such as school or medical fees
• Giving an employee or their associate access to paid entertainment by giving them free tickets to events
• Making a salary sacrifice arrangement with an employee which includes benefits.

For FBT purposes, it is important to determine a worker’s employment status. Whether someone is employed as a volunteer, contractor, or employee is what determines their employment status in this context. Contractors and volunteers usually do not attract an FBT liability on benefits provided by their employer. Those engaged in ongoing, formal employment are likely to attract an FBT liability if they are provided with such benefits.

If you think you may need to pay fringe benefits tax, but are unsure, speak to your accountant or registered tax agent to seek clarification. The ATO requires employers to assess their own FBT liability for each year, with the FBT year running from the 1st of April to the 31st of March.

FBT Exemptions

As an employer, not all benefits you provide to employees will attract an FBT liability. If the benefit is directly related to the employee’s work or duties as part of their role, it may be assessed as a work-related item and therefore exempt from FBT. The following are examples of benefits that are likely to be assessed as work-related items:
• Tools of the trade
• Computer software or hardware
• Electronic devices including laptops, mobile phones, GPS systems, printers, tablets etc.
• Briefcases or other containers
• Protective clothing.
There are limits on work-related benefits that are exempt from FBT. If you provide a mobile phone, for example, you cannot provide the employee with another FBT exempt mobile phone until the next FBT year. If the original item is broken and a replacement is ordered, the replacement may be exempt from FBT. Exempt items must be things which will primarily be used for work, not private use.

Small businesses were recently granted an extension on the work-related item extension, allowing them to provide more than one work-related item of a particular function within a given FBT year. This means that the above requirements pertaining to the one-item-one-year exemption limit does not apply to small business employers.

Property Fringe Benefits

If you provide an employee or their associate with goods or property at a discount, or for free, this may constitute an assessable fringe benefit that attracts FBT. Examples of property fringe benefits might include:
• Real-estate/real property, such as buildings or land.
• Goods such as appliances, clothes, entertainment products etc.
• Other property, such as bonds or shares.

Residual Fringe Benefits
Residual fringe benefits are those which are the hardest to define, yet still satisfy the criteria required to attract an FBT liability. Remember that for tax purposes, benefits are defined as being any item, privilege, right, facility, service etc. that is not work-related.

Examples of benefits that might be assessed as residual fringe benefits include:
• Provision of services, such as a plumber offering their services free of charge to an employee
• Allowing an employee to make use of items or property owned by the employer, such as a camera or entertainment system
• Allowing an employee to make private use of a work vehicle which is not assessed as a car in relation to FBT, such as a motor scooter or utility.

If you are unsure whether or not you may be attracting an FBT liability through residual benefits, speak to your registered tax agent or accountant.

How Do I Reduce My FBT Liability?
If you believe that you may be providing benefits that attract an FBT liability, you may decide to replace these fringe benefits with other things that do not attract FBT liability. For example:
• By replacing or making-up for the lost fringe benefits with additional wage or salary payments
• Choosing only to provide your employees with benefits that do not attract an FBT liability, such as work-related items
• Replacing fringe benefits with other benefits that your employees would be eligible to claim as deductions on their income tax should they be required to meet the expense themselves
• By using employee contributions to offset the FBT liability. An example of this would be that you require an employee who is allowed to make use of their work car for private purposes to pay the operating costs of the vehicle. Be aware however that employee contributions may be subject to GST and may contribute to your assessable income.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne tax accounting services, or email us at admin@kingstonknight.com.au.

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Renting and Leasing Commercial Property

Renting and Leasing Commercial Property – Tax Compliance

Depending on whether you are the owner (lessor), or tenant (renter), different reporting and or compliance measures will apply to you. This is with regard to income tax and GST, and the deductions claimed on relevant expenses with respect to position as owner or tenant. Income related expenses are calculated according to how you generate taxable income, and deductions from your tax liability are made on the basis of these income-related expenses.

For an owner/lessor, expenses that facilitate the derivation of rental income from the premises are income-related expenses. For a renter/tenant, rent payments themselves are income-related when they are renting their business premises, and therefore rent is an income-related expense.

Owners/Lessors
As the owner of a commercial property which you lease to a tenant or renter, payments received for rent or rent-related payments are included in your personal income. When lodging your personal income tax return, you will need to include the full amount paid to you by tenants in your income statement.

You may be able to claim tax deductions on certain expenses related to the acquisition of rental income from the property you own. These expenses are referred to as income related expenses.

You are able to claim a tax deduction on income related expenses incurred during the reporting period, so long as the property was rented or actively available for rent during that period. You are generally able to claim an immediate deduction for expenses related to the maintenance and management of your commercial rental property, this includes the interest paid on some loans.

Tax deductions on other expenses may need to be claimed over several years. For example, costs of depreciation are calculated over a number of years and claimed for the value of that depreciation at the time the claim is made. Depreciation costs that may be income related for lessors include the depreciation of an asset’s value, such as furnishings and fixtures, as well as some construction expenses that may be assessed as capital works expenses.

As the owner/lessor of a commercial premises, you are generally unable to claim tax deductions on the following:
• The costs of acquiring and disposing of the premises, though these costs may be used to calculate the cost base of the premises when determining any capital gains tax liability.
• Expenses paid by tenants/renters, including amenities like electricity and water, as well as maintenance or other works paid for by renters.
• Expenses with a private component or that otherwise do not relate to the property’s function of deriving rental income.

GST Liability for Owners/Lessors
If you are assessable as operating an enterprise, then you are required to register for GST. The details of this assessment depend on individual circumstances, but if you are involved in the purchasing, sale, developing, or leasing of property and the turnover derived from this exceeds the GST threshold, you will attract a GST liability.
In this case, you are able to claim GST Credits on expenses/purchases that allow you to derive rental income from your commercial property. These rules are the same general rules applying to GST credits for all enterprises, and they allow you to claim credits on GST included in expenses such as conveyancing or agent’s fees.

Renters/tenants

If you are renting a commercial property and using this as your business premises, you may deduct the amount paid in rent from your tax liability. If GST is included in your rent (both you and the owner/lessor are registered or required to be registered for GST) then you are able to claim GST credits for this.
For tax purposes, rent paid on your business premises is an income-related expense, as without it you are unable to carry on your going concern. Likewise for lessors, payments that are necessary in order for you to continue deriving rent income are income-related and potentially deductible.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne tax compliance services, or email us at admin@kingstonknight.com.au.

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Tax compliance – rental property income and capital gains

Tax Compliance – Rental Property Income and Capital Gains

A key issue for investors and multiple homeowners is tax compliance on rental property income and capital gains.

With the Melbourne property market charging towards unprecedented levels of growth and value, largely driven by investors who often do not occupy the property they buy, the fruits of selling your property could be greater at the moment than ever before. Different tax rules apply to different types of residential property, for example, property which is occupied by the owner or property which is rented out to tenants with the owner living at a separate address.
Capital Gains Tax in-particular is important for those selling a rental property, current regulations require those who sell a rental property to calculate any capital gain made on the sale and include it in their tax return. A tax concession is currently available for gains made on the sale of a property which qualifies as the owner’s main residence. For rental properties, this does not apply, and regulations state that the sale of property purchased with the intention of generating rental income constitutes a Capital Gains Tax event.

Property purchased with the intention of selling it to make a profit, or to develop or subdivide the property as part of a commercial venture, results in proceeds from such a sale being assessed as normal income acquired through a standalone profit-making venture.

On this page we will explore the requirements for recording and reporting your income and expenses derived from a rental property.

Record Keeping and Joint Ownership of Property
In the event that a rental property is purchased jointly by more than one party, it is very important that each party’s individual interest in the property is recorded for tax purposes as well as for distributing proceeds from rental income.

For individuals who own or co-own a property used to generate rental income, this income is usually assessed as investment income. This is the case for anyone drawing income from a rental property who is not generating the income as part of a registered rental property business, and according to ATO data, less than one in one hundred rental property owners are involved in a rental property business.

A rental property business is classified according to the following criteria:
• The number of hours devoted to management of the rental property/s, or related activities
• The scale and size of activities related to the properties used to generate income from rent
• The level of organization, planning, and operations involved in managing the rental property/s.
• The degree of personal involvement in the management of the rental property/s.

If the property has been negatively geared, it is very unlikely that it constitutes part of a rental property business, and so any income received from rent is likely to be assessed as investment income.
Records should be kept of all payments or transactions that relate to your capacity to derive rental income from the rental property. These records must be recorded in either plain English, or if in another language, be able to translate directly to plain English.

Any records or documentation used in the presentation of your income tax return must be kept for a period of five years from the date of lodging the tax return. These records may be stored by an appointed party such as your solicitor or accountant, though you should always keep copies for yourself and ensure backups are available.
These records will likely form the basis for the calculation of deductions for expenses, and/or to be used in the event of a dispute with the Australian Tax Office or other body. If you become involved in such a dispute, or if specific records are sought from you by the ATO, you are required to keep copies of the relevant records until the dispute or request for additional information has been resolved.

The following are examples of rental expenses for which records must be kept:
• Name and details of the supplier
• Amount, dollar value of the expense
• Description of the products, goods, or services for which the expense was paid
• Dates that the expense was incurred and when it was paid
• Record the date each time you make a record or modify your expenses records.

If you do not record the dates on which expenses were incurred and paid, you are able to use certain items of independent evidence, such as bank statements, to specify when an expense was paid for. Receipts or invoices can be used to specify when an expense was incurred.

Division of Income and Expenses

If a property used to generate income from rent, the income and any related expenses must be divided between owners based on their share of legal interest in the property. As an example, a couple who jointly owns an investment property used to generate income from rent would each list 50% of relevant income and deductions on their personal tax return.
Where the property is drawing rental income as part of a rental property business, income and deductions are split between the business owners based on the partnership agreement binding them in their business relationship.
Small businesses, including rental property businesses, are entitled to taxation concessions such as special depreciation rules. Investment properties are not entitled to these concessions, and investors are required to report the income as investment income rather than business income.

Note that you are not required to attach copies of these records to your personal tax return, or send these records in to the ATO. The reason that requirements for record keeping exist is so that they can be referred to or relied upon in the event of a dispute, or if clarification of certain matters is sought by the ATO.

In addition to the more detailed records described above, it is recommended that rental property owners maintain a succinct summary of their expenses. This can be done in the form of a list or document which does not contain all the details, but contains enough information to enable you to find the details if you need to at short notice. The information listed in your summary may also be sufficient for filling out the rental property schedule as found on the income tax return lodged each year by individual taxpayers.

Reporting Income Generated Through a Rental Property
When you generate income from a property you own that is being rented out, that income is reported as either rental income or other/rental related income. The income tax return document used to report personal income contains a schedule referred to as the rental property schedule. This is where any income from a rental property, or income related to a rental property, is to be reported.

Rental income – This type of income, for tax purposes, refers to money received as rent payments, or any barter, goods or services received in lieu of rent payments. If you receive a service or product other than money from a tenant in the rental property you own, the monetary value of this service or product must be reported as part of your rental income. As with income earned through work, you report the amount of rental income received during the current reporting period.

Other/rental related income – If you have received any form of booking or letting fee, such as through offering your rental property for short-term accommodation and taking a non-refundable fee during the booking process, this counts as rental related income. Also included in this income type are reimbursements, such as the retention of a rental bond due to damage or rent default, or when tenants pay for services or amenities which you then claim a deduction for. Insurance payouts for rent default may be reported as other rental income, but other forms of insurance payout are assessed as capital and need to be reported as such. Speak to your accountant if you are unsure about which income type is which and how they relate to your circumstances.

It is also important to note that investment or rental income must be reported when it is received, even if it is received by someone else on your behalf and you are not actually in possession of it during the reporting period. An example of such a situation may be that rent payments are collected by an agent on your behalf, you would be required to report those payments as rental income even if the money is still in the agent’s possession.

Additionally, income is derived where it is directed by you or on your behalf, even if you do not receive the money. For example, if you direct the tenant in a rental property you own to make rental payments into the account of a third person and not yourself, the money paid by that tenant to the third party forms part of your assessable income.

Expenses and Deductions
Many expenses incurred through the operation of a rental property are deductible, so long as they are connected to the earning of income through rent. Deductions may be claimed for certain expenses incurred during the period in which the rental property was available to rent or was occupied by a tenant.

If you purchase land upon which you intend to construct a rental property, than many of the applicable rates such as water, sewage, council, and emergency services rates are deductible. If at any time your intentions change and you decide to use the land for private purposes, other than for the production of rental or business income, then these deductions no longer apply.

Any private expenses are not deductible, expenses need to be connected to the production of income in order to be deductible.
Capital expenses are also non-deductible, so you cannot claim a deduction on the expenses incurred during the acquisition or disposal of your rental property. Borrowing costs, on the other hand, may be deductible, as are depreciations in value or certain capital works.

Apportionment of Expenses
In some cases, you may not be able to claim a deduction on the complete value of certain expenses. In these cases, the expenses need to be apportioned, that is, divided into deductible and non-deductible portions. The following are examples of situations in which expenses would need to be apportioned in order claim a deduction:
• If you rent a property out at rates considered to be significantly below market value, for example, if you allow friends or relatives to rent accommodation from you at a low cost. In these circumstances, deductions may be limited to the value of rent actually paid.
• If you are a part owner of a rental property, expenses and income must be apportioned to reflect your ownership stake or percentage.
• Where only part of a property is used to derive income from rent, only expenses directly related to the generation of rental income may be claimed. In such cases, apportionment of expenses is conducted on the basis of floor-area; by calculating the floor-area used to generate rental income you can apportion the deductible expenses as a ratio of rental floor-area to total floor-area.
• If more than one rental property is owned, some expenses need to be apportioned appropriately. If you wish to claim travel expenses, but you inspect two properties in a single trip, the expenses incurred during the trip need to be apportioned between the two properties you have inspected.
• Any expense which contains a private component, such as travelling to inspect a rental property you own but also enjoying a trip away at the same time. This also applies to properties which are not let out to tenants year-round. If you or your family occupy the property or it is left vacant and unavailable for let, expenses incurred during this time cannot be deducted.

There are two timing methods which can be used to calculate the period for which a deduction is claimed; the date paid, or the date incurred. Only one method can be used, as using both could result in a deduction being claimed twice.

Common deductions made on rental property income include:
• Borrowing expenses
• Interest
• Depreciation
• Body corporate fees
• Travel expenses
• Repairs and Maintenance of the rental property
• Capital works expenses

Money borrowed to purchase a rental property or carry out works that will allow rental income to be derived from the property provide an example of deductible borrowing expenses. Any money borrowed for private expenses, or expenses not related to the generation of income, are not deductible.

Borrowing Expenses
These included expenses incurred directly as a result of obtaining a loan for the purchase or improvement of a property used to generate rental income. Examples of deductible borrowing expenses might include:
• Title search fees
• Loan establishment fees
• Fees associated with preparing and filing mortgage documentation, this includes fees charged by mortgage brokers and stamp duty applied to the mortgage
• Other fees charged by the lender as part of the loan process, including lender’s mortgage insurance fees, valuation fees, documentation charges etc.

Deductible and Non-Deductible Travel Expenses
When you are required to travel in order to carry out inspections or maintenance on your rental property, or to collect the rent payments or other activities related to obtaining rental income from the property, you may be able to claim a deduction on the travel costs incurred.

In cases where you have engaged in private activities during your travel to or from the rental property, related expenses will need to be apportioned appropriately, as only those directly related to your income from rent are deductible.

There are also some circumstances where travel costs associated with a rental property are not deductible, for example:
• Travel costs incurred when you are collecting rent that is non-commercial, such as rent paid by a family member or friend whom you are letting the property to at a discount.
• If you are making private use of the property, for example travelling to the property and staying there as a holiday.
• Travelling to the property to conduct general repairs or maintenance during a time when it is unoccupied and/or unavailable for rent.
• Diverting your usual route to work or something similar so that you pass by the rental property, in order to check it out or keep an eye on things. This does not have a connection with earning rental income.

Typical expenses included as part of travel related to the management of a rental property include the cost of meals, accommodation, and the transportation (e.g. airfares or fuel costs). You are unable to claim a deduction on the cost of meals if your travel did not involve an overnight stay in the locality of your rental property.

It is a reporting requirement that, when six or more consecutive nights are spent away from your home, a travel diary be kept which lists your activities, places visited, and the duration of travel times and activities. By making notes in your travel diary and affixing the relevant receipts, you have the required evidence to claim deductions on expenses related to earning income from the rental property/s inspected during the travel.

Substantiation records are required to be kept for any car or vehicle-related expenses that you wish to claim as a deduction. There are four methods that may be used to keep the appropriate records, the best method will depend on your individual circumstances. Examples of these substantiation methods include the logbook method.

Claiming Deductions on Body Corporate Fees
Depending on the nature of your rental property, it may or may not be covered by a body corporate or similar entity which charges fees for the day-to-day maintenance and administration of the property. Body corporate fees may be charged to an ‘administration fund’ or other type of fund. Such payments are assessable as payments for the provision of services. Seeing as the body corporate is charging a fee that enables you to derive rental income from the relevant property, these fees or levies may be eligible for deduction claims.

In certain cases, a body corporate entity may request that you pay fees into a fund designated for use in capital expenditure projects. Such levies are not deductible, so be aware of special purpose or designated funds to which you are directed by your body corporate entity. Another circumstance which may limit your ability to claim deductions on body corporate expenses is this; instead of setting up a separate or designated capital expenditure fund, the body corporate may levy funds from their general purpose fund to use as a contribution towards capital expenses. When such payments are made, they constitute a special contribution, which is not deductible.

It is important to note that deductions cannot be claimed for expenses included in body corporate charges, levies, or fees. For example, building insurance, garden maintenance, or building repairs cannot be claimed as deductions if they are included in the body corporate fees you pay. You are able to claim a deduction on the fees paid to a regular body corporate fund, but are unable to claim separately for any expenses covered by the body corporate and paid for through the levy or fees that they charge.

Income Producing Components of Your Rental Property

For taxation purposes, a rental property comprises the building or buildings, land, fixtures, and any separate depreciating assets attached to the property which complement its ability to produce income. Different tax rules apply to different parts of the property, and it can be difficult to work out what is what. Some fixtures or depreciating assets may be assessed under capital gains tax rules, whereas others may constitute capital works. In order to identify what is a depreciating asset, and therefore eligible for relevant expenses related deductions, let’s go through some common examples.

Typical examples of depreciating assets that form part of a rental property include:
• Carpets, linoleum, tiles, and other removable floor coverings
• Internal blinds and window curtains
• Hot water systems.

Claiming the Cost of Depreciation

You may be able to claim a deduction on the cost of depreciation for each separate depreciating asset that comprises your income-producing rental property. In order to claim such deductions, the cost of each asset needs to be determined. The best way to do this is by using the purchase price, which may be evidenced by a receipt.
If you have purchased a rental property that came with such depreciating assets already installed, the purchase contract may have itemized a price for each of the depreciating assets. If this is the case, you can use the price listed for each asset in the purchase contract when claiming deductions.

If you do not have access to the purchase price for a depreciating asset, a valuation needs to be conducted if you are to claim a deduction. It is possible to conduct estimates, but you need to provide evidence which demonstrates that such estimates are reasonable and fair. Obtaining an independent valuation from a valuation practitioner is another way to go, especially if your rental property contains a number of unvalued depreciating assets. When an independent valuation is performed, this is often taken as sufficient evidence that a reasonable value has been ascribed to each depreciating asset.

Claiming the Costs of Construction: Capital Works Deductions
For tax purposes, certain types of construction which enable or enhance your ability to derive income from a rental property are referred to as capital works. You may claim deductions on certain construction expenditure, including:
• Alterations to buildings
• Construction of new buildings or extensions to existing buildings
• Structural improvements to buildings, commenced after February 27 1992
• Capital works which commenced after June 30 1997.

Certain construction or capital works expenditure is specifically excluded for tax purposes, meaning that deductions cannot be claimed for the following types of expenditure:
• The cost of land on which a rental property is built or established
• Capital amount for a loan
• Expenses for plant, though these may be assessed as depreciating assets which can be claimed
• Landscaping expenditure
• Expenditure related to the clearing of land on which the rental property is constructed

For tax purposes, construction expenditure refers to the actual costs incurred when constructing buildings or extensions. If you are selling a rental property, the Income Tax Act specifies that sellers disposing of capital works are required to provide the purchaser with a notice allowing them to calculate any remaining deductions on the relevant capital works. Once received, the purchaser must keep a copy of the capital works notice for five years following their disposal of the depreciating asset/s.

What to Do When the Construction Expenditure is Unknown
If you have purchased a rental property from which you plan to derive income from rent, you may wish to determine the construction expenditure in order to claim relevant deductions if they are still available. In cases where the seller or previous owner is unable to provide the required information, the purchaser may obtain an independent valuation from a qualified practitioner.

In cases where the actual construction expenditure figures are available, you are unable to choose between using those figures and obtaining an independent valuation. The actual figures must be used where they are available.
The following are examples of practitioners qualified to give a valuation on construction expenditure:
• Quantity Surveyors
• Clerk of Works, project organisers who work on significant construction projects
• Builders with experience in the estimation of construction costs for projects of a similar scale
• Supervising architects qualified to approve payments at stages throughout the development of major construction projects.

The following records are required to be kept in relation to capital works and construction expenses:
• Dates on which construction work was commenced and completed
• The specific type of construction performed, used in determining whether or not the construction satisfies the definition of capital works
• Details of the individuals or entities who performed the construction work
• Total expenditure of the construction, note that this is not the purchase price
• A list of dates showing when the property was used to derive income
• Sheets demonstrating the relevant deduction calculations.

If you sell a rental property, keep the above records for five years after the sale. This is important because deductions for capital works can reduce the cost base used to calculate your capital gains tax obligations.

Claiming Expenses for Repairs or Maintenance
For the purpose of claiming a tax deduction, repairs as assessed as the renewal or replacement of a damaged part. In relation to your rental property, this might include the replacement of sections of fencing or guttering following storm damage. Maintenance expenses, on the other hand, are expenses incurred as a result of work carried out to prevent deterioration or to renew existing deterioration. An example of a maintenance expense might be the costs incurred when repainting a rental property.

Some kinds of expenses might intuitively seem to relate to repairs or maintenance, but for tax purposes they are assessed as capital expenses. The following are examples of capital expenses for which deductions cannot be claimed, though they may seem to be related to maintenance and repair:
• Renovations, repairs, improvements and alterations that go beyond the simple restoration of the property to a level of efficient functioning. These are assessed as capital works where they change the nature of the property or asset involved, or if they add something new to the property.
• Repairs or maintenance works performed at the same time as improvements or renovations are being carried out, meaning that the costs cannot be separated between what is an improvement or what is a repair.
• Replacement of items regarded as separate to the property itself, typically fixtures such as a complete set of guttering, an entire fence, and cupboards and cabinets.
• Repairs carried out soon after the property was acquired, which remedy damage, defects, or deterioration that existed on the date the property was acquired.
• Repairs or maintenance works carried out when the property is not producing income from rent, or if the property was not producing income from rent for the duration of the income year in which you incurred the cost of these repairs or maintenance works.

Note that in some cases where you are unable to claim a deduction on capital expenses, you may instead be eligible for a deduction on decline in value for capital works deductions or depreciating assets.
It should also be noted that payments made to yourself in return for managing or maintaining a rental property are not deductible, nor are payments made to family members or friends. Payments made to agents may be deductible, where you use an agent to manage a rental property instead of performing checks and maintenance yourself.

Key Points When Lodging Your Tax Return and Rental Property Schedule
By keeping records of all the above expenses and income elements that influence your tax position, and having a summary of these records on hand at tax time, you should be able to quickly and easily complete your income tax return and the rental property schedule included in it with minimal fuss.

If you own more than property from which you derive income from rent, you need to complete a separate rental property schedule for each individual property. It may be tempting to list all the information in the section labeled Sundry rental expenses, but this may cost you more time later on should the ATO seek clarification. The rental property schedule contains separate labels for different kinds of income and expenses, so use your records to list the information in the appropriately labeled section and you will have minimized the chance of a dispute occurring.
For those that prefer to leave their tax return to a financial professional, they can rest assured that their accountant is complying with the above, thus minimizing the chance of follow up action by the ATO. If you are completing your tax return yourself, taking the time to correctly complete the rental property schedule and placing information under the correct labels will help you to avoid follow up action.

In the case that your expenses exceed the amount of rental income you have received from a property, but you also receive other taxable income such as a salary or wages on which your employer is required to withhold tax, you may be able to claim a tax refund on some of the withheld amount. The following options could suit a rental property owner in this situation:
• Lodge your income tax return and receive a tax refund later in the year
• If it is the start of the year, you may be able to lodge a withholding variation to the ATO. A withholding variation, if approved, would result in your employer withholding less of your income as taxation to reflect your losses incurred through the rental property.

In the event that you have incurred an overall loss, it is advisable that you report your losses in full and retain relevant records until the losses are recouped, and then for five years after the date on which you break even again.
If you are an Australian resident that receives income from a rental property located outside Australia, you are required to list this income at Label 20 on your individual tax return. Note that for tax purposes, income is ‘received’ even if it is held oversees and not able to be accessed by you in Australia.

It is also important to remember that the ATO requires you to list any foreign income or capital gains even if they have been taxed in the country of origin. There is an offset available for tax paid overseas known as the foreign income tax offset, this offset can be found at label 20 of your supplement tax return.
When reporting income derived outside Australia, or in currency besides the Australian dollar, all values and amounts need to be converted into Australian dollars.

Pay As You Go (PAYG) Options

The ATO operates a Pay As You Go system referred to as PAYG, which is available to businesses and individuals alike. Registering for the PAYG system allows you to make instalment payments towards your total income tax burden. The system can be accessed and registered through the ATO’s online system. Once you register, the PAYG activity page will indicate that you are paying a rate of nil towards your tax liability. You can increase this rate as required, meaning that paid instalments will be made regularly, therefore reducing your tax bill and preventing you from having to pay a large lump sum at tax time.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting services, or email us at admin@kingstonknight.com.au.

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Tax Issues and Considerations in the Sale of Rental Property

Tax Issues and Considerations in the Sale of Rental Property

When it comes to tax compliance, rental property, or property used to derive income from rent, differs from residential or commercial property. We have previously covered the tax issues relating to income and expenses deductions for rental property owners, including capital gains tax considerations. However, it is important for rental property owners to be aware of the capital gains tax and other compliance issues that affect their ability to dispose of rental property.

The Australian Tax Office (ATO) has issued reports outlining various issues that they encounter in the reporting of rental income and disposal of rental property. It is our goal to inform clients and unfamiliar readers alike of these issues to ensure that they do not end up engaged in an unnecessary dispute with the ATO. Tax disputes or follow-up action by the ATO is incredibly time-consuming and stressful for all concerned, but by gaining a comprehensive insight into the cause of such disputes and follow-ups, they can be avoided by rental property owners seeking to dispose of their property.

In the ATO report into rental property income reporting and asset disposal, the most frequently cited problems are with the reporting, calculating, and record-keeping habits of those concerned, especially with regard to capital gains.

Allow us to introduce you to the most important capital gains tax considerations for those looking to dispose of rental premises, and how best to calculate and record capital gains. We will also examine record-keeping techniques designed to protect you from unnecessary audits or follow-up action by making sure that you have all the required information on hand in a form that is easily accessible and can be produced upon request.

Key issues examined in this report include:
• The calculation, recording, and reporting of capital gains or losses
• Proceeds of sale recording
• Cost base determination, used to calculate capital gain or loss
• Main residence concession and its effect on rental premises
• Key areas that the ATO focuses on in this context to ensure compliance.

Selling A Rental Property

A rental premises is one that is used to derive income from rent or rent-related payments. If you purchase a property in order to use it to earn income from rent, any subsequent sale of the property is a capital gains tax event and will require the appropriate records to be kept and reports to be made.

The sale of rental property attracts capital gains tax obligations where the seller intends to derive profit from the sale of said property, or the property is to be developed or subdivided as part of a profit-making venture. Property is an important asset, so it is highly likely that the sale of a rental property is initiated by a desire to derive profit from the sale.

Proceeds from the sale of rental property are reported as income, whether that income is earned as part of a property business (developing or subdividing the property) or as a one-off profit earning venture. For many property sellers, the latter is the most common, but for tax purposes this is still assessed as carrying on an enterprise. This is due to the fact that profit is likely to be derived from the sale, as well as the fact that the property was used to derive income prior to the sale.

It is very important to keep records of all relevant works and transactions which may be used to calculate your tax burden, and especially capital gains tax following the sale of the property. Such records include the stake of each owner, where a rental property is owned by more than one person, as well as details and records of any works or improvements made to the property whilst it was being used to derive rental income. Records of rental income should also be kept. When you decide to sell your rental property, it is very important that records are kept for any offer made and your resulting acceptance documentation. A list of depreciating assets should also be kept for tax assessment purposes.

Capital Gains Tax

When selling an asset such as a rental property, any gain made from the sale proceeds is referred to for tax purposes as a capital gain. If a loss is made, that is that the sale proceeds do not meet the amount paid for the property, then a capital loss is likely to have been incurred following the sale. Capital gains tax is part of the income tax assessment conducted by the ATO, and is not a separate tax in its own right. Capital gains and losses are used to calculate your total assessable income for the year in which the CGT event occurred.
If a rental property is owned by more than one individual, any capital gain resulting from the sale of the property is split evenly between the owners, as determined by each owner’s legal interest or stake in the rental property and the proceeds derived from its sale. A good example is this; if two partners in a relationship or marriage jointly own a rental property, and decide to sell it, then any capital gain from the sale is split evenly between them, meaning that 50% of the capital gain is applied to the assessment of each partner’s individual income tax return for the year in which the sale occurred.

This also applies to capital losses. If a capital loss is incurred following the sale of a rental property, the value of this loss is applied evenly to the personal income tax assessment conducted for each individual owner based on their legal interest or stake in the property. Capital losses may be used to offset capital gains made in the present income year, or deferred in order to offset gains made in future income years.

If the property was acquired by the seller prior to September 20th 1985, any capital gain or loss on the sale of that property can generally be disregarded, as this was the date in which capital gains tax was introduced and began to be enforced. If the property was acquired before this date, but you have carried out major works or development on the property since then, these may constitute capital works, and contribute to a capital gain or loss on the sale of that property.

The ATO has warned rental property owners about capital gains tax concessions for small businesses, which are eligible to make use of four concessions when disposing of property assets. Rental properties are not considered to be active enterprise assets, that is, your rental property activity does not constitute a going concern unless it is part of a registered rental property business. This means that small business capital gains tax concessions cannot be applied to the sale of rental property by private owners, even if you are running a small business enterprise.

A good example is negative gearing, if a rental property has been negatively geared, it is assessed as a passive investment and not part of any enterprise or going concern, therefore it is ineligible for any relevant concessions or discounts.

CGT and Your Assessable Income

Capital gains tax is used to assess your income which you pay tax on when you submit an annual income tax return. It is regarded as a component of income tax rather than being a separate tax in its own right. Whatever your marginal tax rate is, this is used to calculate the tax burden on any capital gains you make during an income year, unless these are offset by capital losses.

You attract a capital gains tax burden whenever your derive proceeds from the sale of an asset which exceed the value of the asset’s cost base.

When a capital asset is sold, the amount you receive is referred to as the capital proceeds of that sale. Capital proceeds are the amount of money or the monetary value of goods, services, or property that you receive or are entitled to receive from the sale of your asset.

When filling our your income tax return, the capital gain or loss amount you must include is calculated as:
• The total capital gain amount for that income year, that is, the combined total of your capital gains minus capital losses incurred through the sale of capital assets
• Any relevant CGT discounts may be applied to arrive at a final taxable capital gains figure.
Determining your Rental Premises Proceeds of Sale Figure

If you decide to sell a rental property, the tax burden is applied at the date the contract is signed and not the date of settlement. That is, if you sign the contract in April but settlement does not occur until July, you are taxed for the financial year in which the contract was signed (the financial year including April and ending in June, prior to the settlement date).

A typical contract of sale for a rental property, or other residential property, includes the following:
• The land on which the premises is located
• Buildings
• Depreciating assets.

It is standard practice for the land and any buildings attached to it to be assessed as a single asset and referred to as such, e.g. the rental property. Depreciating assets, elements of the property whose tax value is determined by depreciation rules, are assessed based on their value at the time or purchase or the value ascribed to them by a suitable and independent valuation practitioner.

The rental property itself, including the land and buildings, is a capital gains tax event in its own right regardless of the depreciating assets, which are treated separately. The contract of sale usually lists the amount offered (and accepted by the seller) for each asset, this includes the rental property (buildings and land) and depreciating assets.

In order to calculate the CGT attracting proceeds of sale, you need to identify the value of the depreciating assets as listed in the sale contract, and deduct this amount from the total value of the contract. For CGT purposes, depreciating assets to do not constitute part of the cost base for a rental property, and therefore are excluded. The final cost-base and capital proceeds is recorded as the amount received or which you are entitled to receive, for the rental property minus the amount attributed to depreciating assets.

If you decide not to include the depreciating assets in the contract of sale, i.e. you are giving them away to the buyer, then you are assessable as having obtained the market value of these depreciating assets at the time the CGT event occurred. This is referred to as market value substitution of capital proceeds.

An Example of Capital Proceeds Calculation

If the sale contract for a rental property is valued at $700,000, and the depreciating assets identified in the contract are valued at $5000, then the capital proceeds are calculated by deducting the $5000 offered for the depreciating assets from the $700,000 offered for the rental property itself. This results in a capital proceeds amount of $695,000.

Determining Your Rental Property Cost Base

This is the next step, as your total CGT liability is calculated as the proceeds of sale/capital proceeds (described above) minus the rental property’s cost base. An asset’s cost base is much more than just the amount which you paid for an asset, although that is an important determiner.

For CGT purposes, an asset’s cost base has five elements which are used when making the calculation. These first two are designed to cover the standard capital costs of acquiring and disposing of rental property:
• Up to ten listed incidental costs, costs associated with the acquisition or sale of the rental property, such as: solicitor, surveyor, or real-estate agent fees. Stamp duty costs, the cost of marketing the property for disposal, and the cost of borrowing money in order to acquire the rental property.
• Acquisition cost, the amount which you paid to obtain legal ownership of the rental property or asset. May be calculated as the asset’s market value in some cases, such as in the event that you acquired the property as a gift from some benefactor.

The remaining three cost base elements are related to the costs of owning, improving, or defending your title as the asset’s owner:
• If acquired after August 20 1991, the cost of ownership only includes costs which you are ineligible to claim as tax deductible expenses. If you are deriving rental income from the property, ownership expenses are likely assessable as income deductions. If you use or have used the rental property for private purposes, ownership expenses incurred during the period/s of private use may be used in the calculation of the property’s CGT cost base. Your cost of owning the rental property includes maintenance expenses, insurance and repair expenses, land tax, council rates, and interest on loans acquired for the purchase and/or improvement of the rental property.
• Capital costs incurred during an attempt to preserve or increase the value of the rental property. Such capital costs include the expenses associated with performing substantial renovations or improvements on the rental property which affect its market value.
• Capital costs associated with the establishment, preservation, or defense of legal title. Such costs are less common than the other contributors to a rental property’s cost base, as these are usually incurred through litigation or other disputes such as rezoning or compulsory acquisition of land.
Acquisition costs, capital improvement costs, and incidental costs (costs of ownership) are the most common and important elements to consider when calculating your rental property’s cost base.

An Example of Cost Base Calculation
If the sale contract for your rental property was valued at $500,000, you must first deduct the value of depreciating assets from this amount in order to give the acquisition cost. If the cost of depreciating assets was not listed on the sale contract, you may use an independent valuation practitioner to determine their value.
If those depreciating assets are valued at $4000, this amount is deducted from the sale price of $500,000, resulting in an acquisition cost of $696,000.

Incidental costs incurred during the acquisition of your rental property included solicitor and agent fees of $3000, stamp duty of $7000, and borrowing costs averaged to $1000.
If you used to the property to derive income from rent or rent-related payments for 10 years, and during that time you claimed deductions to the total of $5000 over 10 years, than the remaining $6000 in incidental costs should be added to the cost base for your rental property.

Any ownership costs which you are not eligible to claim as a deduction, such as the $1000 you spend on repairing the rental property’s roof during a time when you used it for private purposes, are also added to the cost base.
If you decided to protect the value of your rental property asset, or improve its value by building a large shed at the rear of the property at the cost of $50,000, you add this capital cost to the rental property’s cost base. Though this will need to be adjusted if you claimed capital works expenses as deductions to your income tax applied to income derived from rent.

The combined total of these cost base elements gives the rental property’s cost base, which is then used to calculate capital gains tax on the disposal of the property.
Calculating your Capital Gain
There are three prescribed methods for calculating your capital gain from the disposal of an asset such as a rental property. These are the:
• Other method
• Discount method, and
• Indexation method.
Generally you may use the calculation method that will provide you with the best tax burden result, though these methods are subject to regulatory change.

The other method is used to calculate the capital gain obtained through the sale of an asset which you have held for less than 12 months. To use this method, you simply deduct the cost base which we described above from the capital proceeds of the sale. The resulting difference is your capital gain or loss which may be applied to your income tax return.

Discount methods available for the calculation of capital gains on the sale of rental property are available to individuals, who are currently eligible for a 50% discount on capital gains. Discount methods are only applicable if you have held the asset for a minimum period of 12 months. If you have owned your rental property for more than 12 months, and you own it as an individual, then you may calculate your capital gain as you would using the other method and then deduct the 50% discount to give your total capital gain.

Indexation methods are only available for assets acquired before September 21 1999. This method uses an indexation factor (CPI) to increase the cost base, however, the indexation factor was frozen in the 1999 September quarter, so if you are eligible to use this method you can index the cost in line with the 1999 September indexation factor.

Main Residence Concession
The family home or an individual’s primary residence is not subject to capital gains tax, so if you are selling the home that you live in, it is not going to attract a CGT burden. This exemption can sometimes be applied to a rental property when that rental property is also your home or main residence.
To be eligible for the main residence concession, the rental property must:
• Have been your primary residence, i.e. your home, for the entire period that you owned the property.
• Land attached to the property must not exceed two hectares.
• Not have been used in the production of assessable income which is subject to another exception.
It is important to be aware of the main residence concession. Say for example that divided your home into two halves, and rented out one half of your property to a tenant and derived rental income from it. In the event that you sell the property, the half which you occupied may be subject to the main residence exemption, and the other half subject to CGT.

In short, if you use your home to derive income from rent or rent-related payments, you may apportion the proceeds of sale using the main residence exemption to reduce the CGT burden on the sale. If the rental property was only used to derive income from rent for a given period, but served as your main residence at the time of sale, then you may be eligible for a partial CGT exemption.

You are also able to nominate a dwelling as your primary residence even if you do not reside there, but you must have resided there at some point.

The Six Year Rule
You are able to use your main residence to derive rental income for up to six years, without you residing there, and still have it classified as your home/main residence and therefore qualify for the main residence exemption.
For example, if you decide to go travelling, or to move temporarily for work or leisure, and rent out your home while you are away, so long as you return to it within six years the property will be exempt from CGT even though it was used as a rental property.

Record Keeping
The ATO regularly lists poor record keeping as one of its primary concerns, and failing to maintain the required records can result in the ATO taking action against you. By keeping detailed and accurate records of your expenses, you will be able to correctly and effectively calculate the capital gains tax liability you will face when you sell your property. This ensures that you do not pay more tax than you have to, and that you do not face unnecessary action by the ATO.

Records are vital for calculating your cost base, and if the relevant records are not kept than the relevant items are excluded from your cost base, thus increasing your capital gains tax liability. By keeping records of all the transactions involved in the acquisition, ownership, maintenance, improvement, and disposal of your property, you will be able to deduct a sizeable cost base from your final CGT liability.
The ATO also requires that you keep records for a period of five years after the CGT event which those records relate to. Penalties apply for the failure to keep these records, as the ATO may conduct follow-up checks. If you have the records, then these checks will be over and done with in no time at all. If you do not have the records, you could face the penalties for improper record keeping and the possibility of further action or investigation by the ATO.

Important points in rental property record keeping:

• Keep copies of the purchase contract for your property, and keep receipts for all transactions and expenses that relate to the acquisition of your property, including legal fees, stamp duty, valuation fees etc.
• If a CGT event occurs, such as selling your property or performing capital works, keep records of all related transactions and expenses such as the sale contract and conveyancing costs. For capital works, keep receipts for work and the details of providers.
• Keep records of all expenditure on improving, maintaining, and repairing your property. Also include records of expenditure related to establishing or defending your legal ownership of the property.
It is vital that you keep records of all expenses and transactions that may be relevant to both income tax in the case of rental income, and capital gains tax in the case of acquiring, improving, and disposing of property. Tax rules are subject to change and the ATO may require more detailed information from you in the future, so it is best to have this on hand to reduce your potential liability.
The cost of reconstructing records which you did not keep can be significant, especially if this is done in compliance with ATO or other regulatory action. Good record keeping can also reduce the tax burden passed on to beneficiaries if you happen to leave them property or assets in your will.
If you own a property in conjunction with another individual or group, then keep records relating to your share of the ownership and expenses, as well as more comprehensive records which may be used in the event of a dispute or disagreement with the other owners.

GST
Property used for residential purposes generally does not attract GST burden, instead they are input taxed. Input tax means that GST is not charged against residential property, so therefore rental property owners are unable to charge GST to their tenants or to claim GST credits. GST should not be included in the sale amount of residential property, either.
Input Tax on residential premises means that:
• GST is not to be included in the sale of residential property
• GST credits cannot be claimed on the sale amount or rental income derived from residential premises
• GST cannot bet charged to tenants paying rent for residential premises.
Note that commercial rental properties ARE subject to GST rules as they apply to all business and enterprise in Australia. The above concerns residential premises, rental properties that are let to tenants who reside at the property or use it for private/non-income-producing purposes.
GST rules differ for residential property that is assessable as new, that is, developed and then sold without being sold by the party that ordered it to be built. Residential property is assessed as new when any of the following points apply in the circumstances:
• The premises have not been subject to sale as residential property
• The premises have been developed through substantial renovation or redevelopment
• Old buildings have been demolished and replaced with new buildings
The sale of a new residential property is subject to normal GST rules and GST credit requirements. If you are selling a new residential property, you are able to claim GST credits for purchases related to the sale, such as conveyancing fees and agent fees. You are also liable to pay GST on the sale of a new residential premises.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting services, or email us at admin@kingstonknight.com.au.

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Tax Compliance Services

Tax Compliance Services

Kingston Knight’s tax compliance services offer a cost-effective way to improve the way that your business works by ensuring that it is structured appropriately. Our tax team is committed to delivering exceptional tax advice and due diligence services that minimize your costs and reduce the risk of costly disputes or audits.

Some of our key tax and compliance services include:
• Personal Income Tax
• Corporate Income Tax
• GST
• Stamp Duty and Property
• Employment Taxation, including PAYG advisory and payroll services
• Trust Taxation
• Fringe Benefits Tax
• Capital Gains Tax
• Compliance Services
• Tax Due Diligence

Registered Tax Agent

Kingston Knight Accountants are registered tax agents who are able to conduct your tax affairs on your behalf. We can do this by preparing and lodging your tax returns for you, and by giving you advice on tax matters. In Australia, only registered tax agents are able to charge fees for the preparation and lodgment of tax returns.
Registered tax agents undergo registration through the Tax Practitioners Board. The Tax Practitioners Board publishes a list of registered tax agents on their website, allowing you to verify whether a person is in fact a registered tax agent or not.

The Tax Practitioners Board requires all registered tax agents to abide by certain rules and standards of professional conduct, providing consumer protection through the following:
• Ensuring that registered tax agents comply with the Tax Practitioners Board Code of Professional Conduct.
• By maintaining a minimum standard of experience and qualifications that are required for registration with The Board.
• By ensuring that registered tax agents discuss the nature of the services they provide for clients so that both parties know what to expect.

Registered tax agents also have access to special tax return lodgment rules, which allow them to lodge tax returns on behalf of clients after the October 31 deadline. The extended due date depends on your circumstances, so contact us for advice if you believe you might not meet the normal deadline for lodging your tax return.

If you have missed one or more tax returns in previous years, that is, you did not lodge them with the ATO, then you will need to get back on track as quickly as possible to avoid any penalties. A registered tax agent is able to prepare tax returns relating to prior years, and lodge them with the ATO on your behalf. If you believe you have missed a tax return in previous years, contact us for advice, we may be able to lodge the missing return for you and avoid/minimize any penalties.

What Is Tax Compliance?

Tax compliance is the assurance that a taxpayers financial reporting, deductions claims, and tax return information is in line with their obligations as members of the Australian community. Not all those who receive an enormous tax bill, or a penalty for unmet tax liabilities, are deliberately avoiding their obligations. The system which sets out and enforces these obligations is subject to change, and it does change in significant ways almost every year. It can be difficult to stay up-to-date with the relevant changes and what they mean for your tax liability.

Investments and Tax Compliance

Return on investments is generally part of your assessable income, meaning that expenses related to the acquisition and maintenance of your investment may be tax deductible. In Australia, you may be taxed for investments which are held overseas, including the acquisition, ownership, and disposal of these assets.

By gaining an understanding of how your investment activity may affect your tax liability, you will ensure that you never pay more tax than required. We can discuss your investments with you and examine the appropriate records in order to calculate your liability, and discuss ways in which this may be offset or reduced as appropriate. If you do not meet your tax obligations on investment income, whether deliberately or because you were not aware of those obligations, you may face penalties or an increased liability. Speak to us today if you are unsure about how your investments might be affected by tax.

Tax for Businesses and Standard Business Reporting (SBR)

We are able to advise and assist businesses, brand-new or well-established, on tax matters relevant to their circumstances. We can assist you by preparing and lodging tax returns, as well as calculating and forecasting your overall tax liability and providing relevant advice.

Standard Business Reporting is the current standard approach to digital and online record keeping for business’ financial and tax records. As registered tax agents, we use SBR-enabled software, and can provide you with cloud access to our digital services. This allows us to collect and compile your reported information into a standardized form which we can submit directly to the ATO.

Standardized Business Reporting is a highly efficient means of preparing and submitting your tax details to the ATO. As we invest in the software, your cost is limited as we are not required to perform the administrative and paperwork tasks that were once required. This said, SBR may not be suitable for use in given situations, which is why the work of registered tax agents remains so important. We are able to sift through the details for you and give you the clearest picture of your tax obligations, and ways in which they can be met.

Claiming Tax Deductions

Many of the taxes listed above included exemptions or discounts for certain taxpayers in given circumstances. As registered tax agents, we are able to assist you in claiming all the discounts, deductions, and exemptions which you may be eligible for. If you are unsure about what you might be eligible to claim, we can assist you in identifying the tax structure of your business and/or the components of your assessable income and expenditure to give a clearer picture of your tax liability.

Income tax deductions are often much broader and unique to individual taxpayers, though the ATO does monitor benchmark expense levels for taxpayers in different income brackets. This means that if you claim an unusually high amount in income tax deductions, you may attract follow up action from the ATO. This is why it is important to enlist the assistance of our tax compliance practitioners.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne tax compliance services, or email us at admin@kingstonknight.com.au.

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